A close look at the UK labour market reveals that certain conclusions about inequality don’t quite hold up. Still, there are other headwinds to watch.
Incomes in Britain — as in many countries around the world — have suffered hugely in the decade following the financial crisis. It’s therefore clear that Britain’s jobs market, as the main source of income for most households, has room for improvement. But simplistic and wrong-headed descriptions of its problems abound, meaning it’s far too easy for policy-makers to jump to the wrong conclusions.
First, with public concern about inequality at a 21-year high in Britain, many assume that inequality has shot up. But the inequality of household incomes has been broadly flat for nearly four decades, since the 1980s, while hourly wages have actually become less unequal in the past two decades, thanks to the introduction and ramping up of the minimum wage. Certainly, the level of inequality remains too high; it is as high now as it was at the end of the 1980s, a period of very sharp increases. But we mustn’t let rising concern about inequality — probably because anemic growth for everyone has made us think more about how that growth is shared — lead us to the wrong conclusions about actual rises.
The second wrong conclusion is related to the first. It is the assumption that even if inequality between low and high earners hasn’t grown, too many people in certain demographic groups or living in certain parts of the country are excluded from the labour market altogether. In fact, Britain’s remarkably strong employment growth in recent years has closed employment gaps for those with the lowest qualifications, people with disabilities and those in the lowest-employment subregions. The gender pay gap continues to narrow. And educational attainment has risen fastest for ethnic-minority women. That’s not to deny that large gaps remain, but opportunities to participate are growing.
The third wrong conclusion, in relation to the UK, is that some combination of industrial change, globalization, technological advancements and taxation must have led to a rising share of national income going to the owners of capital in the form of profits. By contrast, the share going to labour, in wages and salaries, must have declined. A falling “labour share” would imply that even if inequality among workers hasn’t changed in recent decades, inequality between workers and capitalists has grown. But while this is a good description of many advanced economies, it doesn’t seem to fit with the data, which show that the labour share has held up since 1980 — in both the UK and Canada. In other words, it would be wrong to claim that workers as a whole are getting a shrinking slice of the pie.
But all this myth-busting good news mustn’t lead to complacency. The most obvious counterpoint is that the big-picture backdrop to all this is extremely weak pay growth over the past decade. To some extent, this has been the flip side of extremely strong employment performance, but more fundamentally it reflects woeful productivity.
Beyond weak pay growth, there are a number of headwinds pushing against the reasonably positive story told above. For example, while gaps in hourly pay rates have narrowed, declines in total hours of work for lower-paid workers in Britain mean that inequality in weekly earnings has been slower to go down. While the number of jobs has grown a lot, sharp increases in insecure and atypical employment forms like “zero-hours” contracts and agency work have increased precariousness for a minority. And while employment has more than recovered from the 2008-09 recession, the rate of mobility between jobs has not. This is a concern because job-to-job moves are the best way for people to get big pay raises, are a sign of worker confidence and have wider economic benefits by quickly matching workers to the most productive firms.
So while there are some positive developments in the headline numbers (except on pay), the headwinds of working time, employment security and job dynamism mean labour market developments can feel far less rosy for people in their lived experience.
How should policy-makers respond? Their mantra should be that a tight jobs market with record employment is the right environment in which to do something — but they should avoid throwing the baby out with the bathwater. They must strike a balance between improvements for workers, and the risk that tighter regulation could hamper employment growth. After all, Britain’s flexible labour market has served workers far better, in general, in recent years than some of the more rigid continental European systems.
A wise response might include measured steps to boost employment security — for example, through a right to a regular contract for those working regular hours on a zero-hours contract, and through minimum notice periods for shift work — rather than banning atypical forms of employment altogether. It might mean raising our ambition to push the minimum wage to new highs, given the scant evidence to date that higher minimums damage employment, but doing so at a pace that is slow enough to pull back quickly if negative effects materialize. And it might mean expanding employment support beyond the unemployed to workers stuck in low-skilled jobs, so that they can take up opportunities to change jobs or to train to progress.
Nothing’s perfect — and the British labour market certainly isn’t. But ensuring that it narrows rather than widens disparities requires a thorough understanding of what has and hasn’t happened to date, and a policy approach that cherishes the positives at the same time as it seeks to do better.
This article is part of the Ensuring inclusive prosperity when all boats aren’t being lifted special feature.
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